Russia Eyes World's Energy Markets

By Sergei Blagov

The Russian government has moved to adopt a strategy through 2020 to "position itself" as a leader in the world's energy markets. Yet with a looming flood of Iraqi oil this strategy may soon undergo a re-think.

In May, the Russian government approved the country's energy strategy. According to the draft, by 2020 Russia is to pump 450-520 million tons of crude oil and 700 billion cubic meters of gas per year. With domestic demand stable, the bulk of the surplus is destined for exports. In 2002, Russia pumped 379 million tons of crude, 9 percent up compared to 2001.

However, the energy strategy draft, which has been debated for the more than a year, now seems to be set for a major re-write. Until late last year, Russian energy strategy aimed at taking over from Saudi Arabia as the main oil provider to the US. At their May 24, 2002 summit in Moscow, United States President George W. Bush and Russian President Vladimir Putin signed a joint declaration on energy cooperation.

At the "energy summit" between in Houston in October 2002, Russian and American officials signaled readiness to boost Russian oil supplies to the US. Russian executives told the Houston summit that Russia could export as much as one million barrels a day to the US within five years.

Notably, in October 2002 Russia's state-owned Rosneft oil company and the US firm Marathon Oil Corporation announced a decision to participate jointly in Urals North American Marketing (UNAM), a project to supply oil from the Urals region in Russia to North America. Actual supply under this project was due to begin in the third quarter of 2003, but now it's far from certain whether this plan may materialize.

In the wake of the war on Iraq, which Russia had strongly opposed, plans of Russian oil supplies to the US look increasingly unrealistic. Moreover, in the wake of Iraq war a potential conflict between Russian and US oil firms is brewing. US officials have warned that Russian companies had little hope of fulfilling contracts to develop Iraq's oil reserves because of Russia's opposition to the US-led war.

LUKoil has threatened to seek a court injunction from an international tribunal in Geneva to block any attempts to develop the field and to seize all Iraqi crude if the country's postwar administration allows West Qurna development. LUKoil signed a contract in 1997 to develop the oilfield and pledged to invest some four billion dollars by 2020. Now LUKoil insists it still owns the right to develop the oilfield.

Meanwhile, the consolidation of the Russian oil industry is widely seen as a sign of the country's growing competitiveness in the global economy. YUKOS-Sibneft's $15-billion merger, that created the world's fourth-largest private hydrocarbons producer with a market capitalization of $35 billion, gave Russia a strategic player in the global oil industry which will give its businesses greater clout worldwide.

On the other hand, the Russian oil sector needs stable and predictable crude prices. Moscow is wary that with a possible flood of Iraqi oil, Russian Urals crude could become less competitive and much cheaper.

After meeting OPEC president Adbullah al-Attiyah's in Moscow last May, Russian Energy Minister Igor Yusufov said that Russia was prepared to join other oil-producing nations in cutting back exports if prices dropped too low. He did not name that low price level, saying only that Russia favors a range of $20 to $25 per barrel. In the past, Russia has twice promised to cut its exports to help OPEC support oil prices, but rarely sticks with its pledges.

Al-Attiyah, also Qatar's oil minister, said OPEC wants Russia to be a full member of OPEC. Yusufov said: "Russia's accession to the OPEC is a matter for negotiations," indicating that Russia would remain a non-OPEC producer. However, Russia accepted OPEC's invitation to attend its meeting June 11 in Qatar as an observer.

Founded in 1960 in Baghdad, Iraq, OPEC aims at coordinating and unifying petroleum policies among member countries, in order to secure stable prices for petroleum producers. OPEC's 11 members collectively supply 40 percent of the world's oil output, and posses more than three-quarters of the global proven crude reserves.

OPEC's members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Since the end of the US-led war in Iraq, there has been speculation that the country would leave OPEC. Subsequent oversupply and a sharp drop in oil prices would be detrimental to the Russian economy as the state budget was heavily funded by revenue from the commodity.

A sustained period of high oil prices provided the cash: the government's budget went into surplus in March 2000 -- and has stayed there -- while oil companies' investment capital quickly trickled down to the rest of the economy, throwing fuel on the consumer-spending fire.

Hence, 2003 may become Russia's fifth consecutive year of growth, fourth of budget surpluses and third of early debt payments to international creditors. The economy remains in the midst of a bull run.

However, in his address to the nation earlier this year, President Vladimir Putin acknowledged that most of Russia's good fortune over the last five years has been "due to external circumstances." He also says that the "pace of reform is too slow," and challenged the government to find ways to double the size of the economy by 2010, which would require average annual growth of about 8 percent.

It is understood that if crude oil prices permanently fall to $10; the global economy quickly recovers and interest rates rise again; and the euro plunges against the dollar, Russia's high inflation rate and strong ruble may become economic problems. In this scenario where all these things happened at once, Russia may face serious problems, although they are unlikely to be as bad as in 1998. With a backdrop of the economy's strong performance over the last five years, the consensus is that the Russian economy is relatively safe, at least for a few years.